Recovery underway

Take-up in the first quarter of 2021 in Luxembourg was almost as high as in the whole of 2020. Following a catastrophic year with Covid, demand is back. The vacancy level remains very low. There is a substantial project pipeline.

Following a very difficult year in 2020 (take-up of 154,132 sqm), demand for office space seems to be back on the rails. During the first quarter, almost 122,000 sqm were the subject of transactions. And the rest of the year is set to be interesting and dynamic.

The Luxembourg office market continues to perform despite the challenges presented by the pandemic. A diverse mix of occupiers closed five deals greater than 10,000 sqm each. The build-to-suit Post HQ in the Station district is the largest at 27,700 sqm. The Luxembourg Wort pre-letting of 3,187 sqm in Howald is also included in the figures. Pre-lets continue to drive activity as available space remains scarce, particularly for those occupiers needing large surface areas. The Publications Office of the EU (OPOCE) secured 18,000 sqm in the Station district for their future offices. A private bank pre-let 17,303 sqm in Esch/Belval, and the Red Cross pre-let 13,400 sqm in Howald. These represent the top transactions of the quarter.

The Station district attracting attention

“The last two quarters have seen the Station market top more than 100,000 sqm of take-up, driven by large build-to-suit projects”, explains, broker CBRE Luxembourg. “This is part of a larger transformation of the Station district which includes an expansion of the train station, the opening of the new tramline, and the Landewyck masterplan that will provide 2,000 new homes”. Elsewhere, the Airport district saw Union Investment take 10,759 sqm in Aerogolf Center II. The striking Royal Hamilius in the CBD is also to welcome EQT Management (4,084 sqm). Overall, the active BFI and services sectors recorded outstanding activity in the first quarter. “What is striking is that 82% of deals are lower than 829 sqm,” explains Jean-Nicolas Montrieux, CEO of Inowai. “This is a very small size. It demonstrates the diversity of the market. Occupants are in the process of defining their post-Covid strategies. Remote working is here to stay, but the issue of cross-border workers who cannot work from home more than one day a week, remains to be resolved. Decisions by occupants regarding new space should speed up by the summer. Luxembourg is still benefiting from the favourable fall-out from Brexit. And economic growth remains a positive factor”.

Prime vacancy at 3%

Approximately 153,800 sqm of office space is considered vacant out of a total stock of 4.54 million sqm. “Vacancy remains very low. It is under 3% in attractive markets such as the CBD, Kirchberg, Station, Strassen and Esch-Belval”. The Cloche d’Or is in a similar position at 4.0%. All submarkets remain under 10% vacancy, underlining the widespread low availability across the market. Large, quality surfaces are especially scarce, with just two of over 4,000 sqm currently available – Monnet 8 in Kirchberg and Quatuor in Cloche d’Or. In specific markets, the CBD numbers three available surface areas of more than 1,000 m², while Station can claim just two.

A well-filled pipeline

Of the 158,000 sqm delivered in the first quarter, 98% are already pre-let. The high volume of completions is due to the 158,000 sqm KAD 2 project. “For the remainder of 2021, the pipeline is 130,000 sqm, consisting entirely of small and medium-sized projects (<20,000 sqm), observes broker CBRE Luxembourg. Of this figure, two-thirds remains available for lease. Projects with available space include Buzz (16,000 sqm) in Leudelange, Royal Park (10,500 sqm) in the CBD, Origin (3,700 sqm) in Strassen and Moiré (6,400 sqm) in Esch-Belval. For 2022, the pipeline expands to 235,000 sqm, of which half is currently available.

What can we expect in 2021? “Take-up is expected to come in at around 300.000 sqm (including 158.000 sqm by the European Parliament in their new KAD building)”, predicts Jean-Nicolas Montrieux. “253.000 sqm of new offices should be delivered this year, but 80% of these new surface areas are already pre-let.” The vacancy rate is expected to stabilize at around 3.3%. An increase in subletting has to be expected. Rental levels should remain stable in 2020.

Investment: remaining calm

Investment saw a relatively calm year in 2020 with 1.3 billion Euros placed via 31 transactions. The first quarter of 2021 has been just as calm with 228 million Euros of deals. Unusually, a retail shopping centre claimed the top investment volume for the quarter – Cora Foetz sold for ? 65 million. In terms of offices, ?131.5 million of deals was recorded for the quarter. Howald was the site of the two largest office deals – the Catella acquisition of Show and Befimmo’s acquisition of Cubus I. High competition for core assets has pushed prime yields to 3.5% in 2021. “The situation in Luxembourg encourages investment. There is a great deal of capital. And interest rates remain very low. Investors have their eyes out for assets with a diverse character, either mixed use or residential”.